Bridge Loans

We seem to be getting quite a few questions about bridge loans given how competitive the housing market is right now. I put together a general idea of what bridge loans are and how they work below. Please call with any questions, I’d be to walk through them in detail!

Bridge loans are typically used to “bridge” the gap in down payment between a borrower’s current home and the new home they are purchasing. They are popular in this type of competitive market where borrowers may be buying a new home before selling their current home. These types of loans do not help out with a borrower’s debt-to-income ratio, just the needed down payment funds. They can be structured as a 1st mortgage where their existing mortgage is paid off and the balance rolled into the bridge loan or they can be structured as a second loan where the borrower has a 1st and 2nd lien on their current property. As soon as their existing home sells, the bridge loan is paid off in addition to the first loan they have on the property. A few pros and cons of these types of loans are:

Pros:
-The borrower can access equity in their current home to be used as down payment (rather than cash out stocks, bonds or even worse, retirement accounts)
-Short-term loan that oftentimes only a payment or two are made before the client’s home sells
-Avoid a double move, the client can prepare their existing home for sale while having already moved out

Cons:
-The potential exists that the borrower could end up with 2 or even 3 mortgage payments if their home does not sell quickly
-They are geared toward borrowers with significant equity in their current property (they do not typically go above 80% combined loan-to-value ratio)
-If the borrower’s debt-to-income ratio is tight, this loan would only increase their ratio (additional debt and larger monthly payment)